ARIA 2021 Annual Meeting

Hanming Fang, University of Pennsylvania and Shanghai Tech University; Xiao Qin, Shanghai Jiao Tong University; Wenfeng Wu, Shanghai Jiao Tong University; Tong Yu, University of Cincinnati

Literally meaning "mutual protection", Xiang Hu Bao (XHB) is a novel online platform operated by Alibaba's Ant Financial to facilitate mutual risk sharing of critical illness exposures. There are three major distinctions between XHB and traditional insurance products. First, XHB leverages the tech giant's platform and digital technology to lower enrollment and claim processing costs. Second, different from insurance applying sophisticated actuarial pricing models, XHB collects no premiums ex ante from members instead equally allocating indemnities and administrative costs among participants after each claims period. Third, XHB limits coverage amount, often below critical illness insurance products, particularly for older participants. We show this restriction potentially leads to separating equilibrium, a la Rothschild-Stiglitz, where low-risk individuals enroll in XHB while high-risk individuals purchase critical illness insurance. Proprietary data from XHB shows that the incidence rate of the covered illness among XHB members is well below that of comparable critical illness insurance. Our findings further suggest the role of advantageous selection in explaining the cost advantages of the Fintech-based mutual protection programs.